energies
Article
Evaluation of Synergies in the Context of European Multi-Business Utilities
Jens Fuhrmann1and Reinhard Madlener2,3,*
1 RWTH Aachen University, Templergraben 55, 52056 Aachen, Germany; [email protected]
2 Institute for Future Energy Consumer Needs and Behavior (FCN), E.ON Energy Research Center/School of Business and Economics, RWTH Aachen University, Mathieustraße 10, 52074 Aachen, Germany
3 Department of Industrial Economics and Technology Management, Norwegian University of Science and Technology (NTNU), Sentralbygg 1, Gløshaugen, 7491 Trondheim, Norway
* Correspondence: [email protected]; Tel.:+49-241-8049-822
Received: 30 June 2020; Accepted: 7 December 2020; Published: 17 December 2020
Abstract:In this paper, we evaluate selected multi-business utilities in the European energy market with regard to synergy potentials. To this end, we survey the development of the energy market in Europe and the performance of integrated versus focused utilities regarding their capital market performance measured by their corporate surplus (or deficit). The analysis is restricted to true business integration, in contrast to horizontal or vertical cooperation among separate firms. The German utility company RWE is analyzed in more detail. We find that, over the last 10–15 years, most of the multi-business utilities investigated underperformed compared to more focused utilities, and that they were even below the STOXX Europe 600 utilities index. Furthermore, synergy potentials need to be evaluated continuously, especially when influencing factors, with the potential to act as “game changers”, are either emerging on the horizon or are already present. We conclude that operating an integrated business model is not necessarily outdated in today’s energy markets, and offers a number of advantages.
Keywords: multi-business firm; multiple business models; market regulation; electric utility industry;
operational synergies; corporate value; RWE; E.ON
1. Introduction
The goal of a multi-business firm is to create more value than what stand-alone businesses would do. This value added is commonly referred to as “corporate surplus”. However, in recent years, a growing number of multi-business firms has been valued with a corporate discount rather than a corporate surplus. This general trend can also be seen in the energy market. Over the last 10–15 years, fully integrated utilities, such as RWE or E.ON, have significantly lost market capitalization. In contrast, more focused companies in the energy sector, such as National Grid or Centrica, have gained value.
Therefore, business economists have been debating whether a certain degree of diversification improves or deteriorates the multi-business firms’ performance compared to more focused companies. At the same time, the energy markets in Germany and Europe have undergone significant changes driven by re-regulation, ambitious energy and climate policy goals, and technical change. Both liberalization and re-regulation simultaneously take place in different geographical parts of Europe, as well as in different sectors of the energy market. This leads to additional uncertainty about the utilities’ future market roles and business models.
A review of both the development of the energy market and the performance of integrated as well as focused utilities shall reflect the capital market’s opinion on future business models, leading to the question of whether the multi-business model is outdated for the energy market. In order to
Energies2020,13, 6676; doi:10.3390/en13246676 www.mdpi.com/journal/energies
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investigate this question, however, the sources of possible corporate surpluses need to be carefully studied. The general opinion is that these surpluses can only be achieved by realizing synergies. In our study, in order to identify utilities’ significant synergies, the German utility RWE is analyzed in detail from a 2012 perspective. RWE is selected as the object of research for several reasons. On the one hand, by operating strong businesses on all stages of the energy value chain, RWE had been fully vertically integrated. On the other hand, by focusing on its core markets, Germany, the United Kingdom (UK), and the Netherlands, as well as on the growth markets in Central Eastern Europe (CEE) and South Eastern Europe (SEE), RWE has had a clear European focus and a broad portfolio of market activities in a dynamic, re-regulated, and increasingly competitive business environment. Thereby, a wide range of (potential) synergies can be evaluated within a single firm. One also can expect that experiences with the effects of regulatory changes on synergies within one market can be translated into future changes within another market, easing the evaluation of expected future effects on the business models of multi-business utilities in Europe. Finally, the 2016 strategic decision of RWE and E.ON (made public in March 2018) to split the former RWE (and now E.ON) subsidiary Innogy between the two firms, aimed at enabling both firms to become more focused and avoid some competition (E.ON selling its renewable generation business to RWE, and in turn receiving the network and retail business from Innogy), fuels the discourse on the merits of more focused vs. more integrated utilities, and will make it worthwhile to undertake another case study on the synergy potentials of these two firms.
In this study, only synergies of true (intra-firm) business integration are evaluated, whereas synergies through horizontal and vertical inter-firm cooperation are beyond the scope of the analysis. Quantitative synergy evaluation demands deep insights and extensive expert knowledge of the respective businesses. In order to be able to discuss and evaluate the complete range of (potential) synergies within multi-business utilities, synergies will therefore be evaluated on a qualitative basis.
Overall, empirical evidence is found for the hypothesis that both already realized and potential synergies can be of significant value to European multi-business utilities. However, these synergies are subject to continuous change due to market evolution and regulatory change. Based on the insights from this study, operating an integrated business model cannot simply be discarded as outdated, even in today’s energy markets, since it offers numerous opportunities that can potentially (and within the existing unbundling rules and obligations of the European Commission) be leveraged into attractive new business models.
The remainder of this paper is organized as follows. Section2starts with a survey of both the energy market evolution in Europe and the performance of “integrated” versus “focused” European utilities, as well as a presentation of the theoretical background on the intra-firm synergies of integrated firms. There are different types of synergies multi-business firms can realize, which, depending on their business model and market environment, can be more or less significant. For this reason, synergies are first categorized and then the evaluation criteria from the relevant studies are presented.
Whereas especially financial synergies, such as the optimization of the risk/return profile, can be evaluated with well-established models (e.g., Markowitz’ portfolio optimization), other utility-specific synergies have not yet been sufficiently considered in this context. Hence, the focus of our study lies on these. In Section3, the methodological approach is described, followed by the empirical analysis in Section4, where, in a first step, all relevant aspects of RWE’s business structure are discussed.
Based on these insights, in a second step, the (potential) synergies of multi-business utilities are uncovered. The results of the empirical analysis regarding the main value-driving synergies are then qualitatively evaluated in detail in order to determine whether the RWE Group would merit a corporate surplus. In light of the rapidly changing energy market environment, a critical review of the expected further development of these synergies is also provided. In Section5, the discussion of the results obtained provides some evidence on whether an integrated business structure can indeed add value in the European energy market and thus whether a corporate surplus valuation by the capital market is justifiable or not. Finally, in Section6a conclusion regarding the potential of synergies within multi-business utilities as well as arising policy implications are provided.
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The challenges due to the structural change in companies and the multitude of new business models (BMs) render the design of a corporate strategy increasingly difficult, and therefore are considered in many studies. Bosbach, Brillinger and Schäfer [1] analyzed the impeding and enhancing factors influencing the efficiency of operating multiple BMs in a corporate portfolio as well as BM innovation as being key to remain competitive. They find that portfolio diversification aligned with the firm-specific corporate strategy is indispensable for ensuring competitiveness. Globocnik, Faullant and Parastudy [2]
provided a conceptual model on how to realize a consistent and dynamic strategy and BM management.
The proposed model enables the perfect alignment of internal activities for BM management and strategic planning by creating an integrated management framework. Morandi-Stagni, Santalóand Giarratana [3] assessed the potentials of reallocating disposable (e.g., free cash-flow) resources across business units (BUs). They concluded that diversified companies increased the resource allocation in BUs that were threatened by competition, instead of reallocating resources to other BUs. Technological synergies between BUs are found to be a negative moderator of reallocation. Snihur and Tarzijan [4]
aimed to identify the effects of BM portfolio complexity. The increase in imitation barriers due to the effects of between-complexity is here discovered to be one of the explanations for the recent findings of high performance in multi-BM organizations. Sohl, Vroom and McCann [5] extended the existing research on the relationship between BM diversification and firm performance. They reveal that demand-related BM diversification showed a positive impact on profitability, especially when there is a strong demand heterogeneity. Sueyoshi and Goto [6] investigated the synergy effects between utilities applying a specialized or diversified BU-structure. They concluded that concentrating on the core business is still the most promising strategy for success in the utility sector. Specht and Madlener [7]
also dealt with emerging BMs at energy supply companies and the challenges they face. The authors conclude that BMs for energy supply companies, in order to be successful, need to switch to a more customer-(or consumer-) centric perspective. Finally, Karami and Madlener [8] studied the effect of BM innovation on electricity suppliers in the retail market. They discovered that those companies that use a customer-/consumer-centric approach are more successful due to an increasing relevance and use of distributed energy resources and new energy and other related services.
2. Theoretical Background
2.1. Business Structure and Market Analysis
2.1.1. Business Structures and Scope of the Firm
For investigating and evaluating the synergies of multi-business utilities, first the structure of such multi-business firms has to be defined and discussed. Firms can be categorized by many different dimensions, such as size, branch, strategic alignment, etc. For the purpose of this study, a differentiation based on their organizational structure regarding product scope, geographical scope, and vertical scope is used.
Figure1introduces a scheme for defining the main stages of the value chain in the energy market, as presented in Section4.1.1below. These stages are defined by the corresponding functions performed in these businesses. The vertical scope of the firm depends on the stages it is active in (i.e., either vertically integrated or focused). The geographical scope (or horizontal scope) refers to the regions in which the firm operates. If it is only active in one geographical market, it is a regionally operating firm. If it is active in more than one country, it is an internationally operating firm. Finally, the product scope refers to the firm being diversified or not. Firms can either only be active in a single industry sector or multiple industry sectors. The exemplary firm shown in Figure1is internationally operating, vertically integrated, and diversified. Depending on the strategic and regional differences between the businesses performed by the firm, businesses are usually divided into business units, which functionally operate independently of each other. Regardless of a firm’s vertical, geographical, or product scope, the goal of such an organization is always to produce more value than what an unorganized or disintegrated firm would do. This value added is referred to as “corporate surplus”.
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However, if multi-business firms fail to create additional value, firms can also be charged with a corporate discount. Figure2illustrates the corporate surplus as the motive to create multi-business firms as well as the corporate discount as a result of the failed creation of value added.
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However, if multi-business firms fail to create additional value, firms can also be charged with a corporate discount. Figure 2 illustrates the corporate surplus as the motive to create multi-business firms as well as the corporate discount as a result of the failed creation of value added.
Figure 1. Organizational structure of a firm regarding the geographical, vertical, and product scope.
Own illustration, based on [9] (pp. 348–351).
Figure 2. Schematic representation of the (a) corporate surplus and corporate discount and (b) corporate premium. Own illustration, based on [10] (pp. 52, 56).
The left-hand side of Figure 2a shows the corporate surplus. In this exemplary case, the multi- business firm consists of three businesses. The size of the bars illustrates the different value components of the businesses. Next to the three stand-alone values of the businesses, the sum of these values can be seen. If—as shown here—the market capitalization of the resulting multi-business firm is higher than the sum of the stand-alone businesses, the multi-business firm is rewarded a corporate surplus. This would reflect the general market opinion for this hypothetical case that the integrated company produces more value than the stand-alone businesses would do. The total value is higher
Vertical scope Geographical
scope Product
scope Market 1
Market 2 Market 3
Stage 1 Stage 2 Stage 3 Stage 4 Stage 5 Stage 6
Product 1 Product 2 Product 3 Product 4 Corporate Center
(a) (a)
(a) (b)
Corporate Surplus
(c)
(a) (a)
(a) (b)
Corporate Discount
(c)
(a) (a)
(a) (b)
Corporate Surplus
(c)
(a) (a)
(a) (b)
Corporate Surplus
(c) Corporate Premium
(a) Internal stand-alone-values of businesses (b) Sum of internal stand-alone-values of businesses (c) Market capitalization
1.
2.
Owner 1 Owner 2
(a)
(b)
Figure 1.Organizational structure of a firm regarding the geographical, vertical, and product scope.
Own illustration, based on [9] (pp. 348–351).
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However, if multi-business firms fail to create additional value, firms can also be charged with a corporate discount. Figure 2 illustrates the corporate surplus as the motive to create multi-business firms as well as the corporate discount as a result of the failed creation of value added.
Figure 1. Organizational structure of a firm regarding the geographical, vertical, and product scope.
Own illustration, based on [9] (pp. 348–351).
Figure 2. Schematic representation of the (a) corporate surplus and corporate discount and (b) corporate premium. Own illustration, based on [10] (pp. 52, 56).
The left-hand side of Figure 2a shows the corporate surplus. In this exemplary case, the multi- business firm consists of three businesses. The size of the bars illustrates the different value components of the businesses. Next to the three stand-alone values of the businesses, the sum of these values can be seen. If—as shown here—the market capitalization of the resulting multi-business firm is higher than the sum of the stand-alone businesses, the multi-business firm is rewarded a corporate surplus. This would reflect the general market opinion for this hypothetical case that the integrated company produces more value than the stand-alone businesses would do. The total value is higher
Vertical scope Geographical
scope Product
scope Market 1
Market 2 Market 3
Stage 1 Stage 2 Stage 3 Stage 4 Stage 5 Stage 6
Product 1 Product 2 Product 3 Product 4 Corporate Center
(a) (a)
(a) (b)
Corporate Surplus
(c)
(a) (a)
(a) (b)
Corporate Discount
(c)
(a) (a)
(a) (b)
Corporate Surplus
(c)
(a) (a)
(a) (b)
Corporate Surplus
(c) Corporate Premium
(a) Internal stand-alone-values of businesses (b) Sum of internal stand-alone-values of businesses (c) Market capitalization
1.
2.
Owner 1 Owner 2
(a)
(b)
Figure 2.Schematic representation of the (a) corporate surplus and corporate discount and (b) corporate premium. Own illustration, based on [10] (pp. 52, 56).
The left-hand side of Figure2a shows the corporate surplus. In this exemplary case, the multi-business firm consists of three businesses. The size of the bars illustrates the different value components of the businesses. Next to the three stand-alone values of the businesses, the sum of these values can be seen. If—as shown here—the market capitalization of the resulting multi-business firm is higher than the sum of the stand-alone businesses, the multi-business firm is rewarded a corporate surplus.
This would reflect the general market opinion for this hypothetical case that the integrated company produces more value than the stand-alone businesses would do. The total value is higher than the sum of the parts. The right-hand side of Figure2a shows the corporate discount. The stand-alone values of the businesses, and thus the sum of these internal values, are the same as in the first case. Contrary to
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the case of a corporate surplus, where the market capitalization of the resulting multi-business firm is lower than the sum of the stand-alone businesses, the multi-business firm is charged with a corporate discount. This would reflect the general market opinion for this hypothetical case that an integrated company produces less value than what a stand-alone business would do. The total value is lower than the sum of the parts. In a market of perfect competition, it is important not only to achieve a corporate surplus but also to be the “best owner” of the respective business.
In Figure2b, the same business structure is shown as in Figure 2a. On the left-hand side, the multi-business firm is rewarded with a corporate surplus (“Owner 1”). On the right-hand side, it can be seen that the same businesses—if owned by “Owner 2”—would be rewarded with a higher corporate surplus than the one achieved by Owner 1. The difference between these corporate surpluses is referred to as “corporate premium”. Being able to achieve a corporate premium compared to the corporate surplus means that Owner 1 is not the best owner for the businesses. In the case of substitutable businesses, the constellation shown results in a permanent competitive advantage in the market for Owner 2 compared to Owner 1. In the case of non-substitutable businesses, Owner 1 is in potential danger of (partly) being taken over by Owner 2, because the latter is able to pay a higher price for the firm owned by Owner 1 than what the market value of that firm is. Generally, synergies are regarded as the reason for the creation of corporate surplus. Failed corporate strategy, by not realizing (enough) synergies, is widely accepted as a reason for corporate discounts (discussed in more detail in Section4.3below).
2.1.2. Performance of Multi-Business Firms and Focused Firms
The divisional firm structure of functional business units and centralized shared services was first introduced by DuPont in the mid-20th century in the US. This structure was subsequently brought to Europe and became the standard for analyzing larger firms. In Germany, for example, whereas in 1950 37% of all large companies achieved 95% of their total sales in only one line of business, in 1960 it was only 27% and in 1993 only 13% ([10], pp. 34–35). This trend to diversify was based on the belief that, in principle, by applying modern strategic management know-how, managers were capable of leading any company without expert knowledge of the respective business. Due to strict anti-trust legislations and the conviction that widely diversified businesses reduce the risk and thus create superior performance for the companies, this trend led to conglomerate diversification [10].
Because of the lack of strategic logic of the business acquisitions, most large conglomerates could not deliver superior value. With failed enhanced performance of vertically integrated and conglomerate firms, and increasing market efficiencies especially in industrial countries, more or less committed strategic alliances provided the opportunity to cooperate vertically without the cost of management for the hierarchic structure of a vertically integrated firm. At the same time, the shareholder value approach became more important. Markets started to charge failed superior performance with corporate discounts and thus put pressure on the managers of these firms. Therefore, a trend to refocus (downscope) on the firm’s core businesses and to divest non-core businesses began in the 1980s and 1990s [10] (pp. 34–36).
In recent years, in terms of the product scope, a trend to refocus on core businesses with strategic bonds is noticeable. In terms of the vertical scope, a trend to outsource and form strategic alliances can be seen; only the geographic scope has seen an increase in diversification ([10] and [11], p. 2).
Debates are ongoing which business model performs better. In [10] (pp. 38–41), it was found that the majority of economists nowadays believe that focusing on core businesses creates more value than broad diversification. This, in turn, does not mean that diversification is generally regarded as a failed strategy but rather that businesses have to fit the core competences of a firm in order to create more value. With a set of core competences that are rather unique, compared to competitors, also strategically fitting businesses can be operated in a more sophisticated manner than without these competences. In turn, this can result in a corporate surplus. Multi-business firms operating their businesses based on such corporate core competences can be seen as “focusing diversifiers” [10].
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Depending on the research methods used, performance indicators, investigated period of time, and the group of firms studied, economists find different results regarding the performance of multi-business firms compared to focused firms. In [10] (pp. 42–44), it was found that modestly diversified companies are a little more stable compared to single-business companies. These findings are based on the percentage of firms going bankrupt within a certain period of time. Furthermore, the authors find examples for multi-business firms with a sustainably better performance than single-business firms. However, according to the findings, this success is not based on the mere fact of diversification, but on superior corporate management of strategically related businesses [10]
(pp. 42–44). Reference [12] found that, on the one hand, the temptation to diversify is generally strong once a company has reached a certain size and maturity. On the other hand, the study states that only a few diverse companies have generated more value through diversification when businesses are not connected adequately to each other. The authors in [12] found this to be the reason for the disappearance of “unlikely pairings” within the years studied. Contrary to many managers’ beliefs, neither does [12] (pp. 1–2) find an assumed better capital allocation across businesses compared to capital market allocation nor do they find an assumed risk reduction for investors to be the basis for superior performance through diversification. Rather, it is found that diversification tends to cap the upside potential for shareholders while not limiting the downside risk. Figure3visualizes this context based on the total return for shareholders (TRS) of the S&P 500 companies from 2002 to 2010.
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strategically fitting businesses can be operated in a more sophisticated manner than without these competences. In turn, this can result in a corporate surplus. Multi-business firms operating their businesses based on such corporate core competences can be seen as “focusing diversifiers” [10]
(ibid.).
Depending on the research methods used, performance indicators, investigated period of time, and the group of firms studied, economists find different results regarding the performance of multi- business firms compared to focused firms. In [10] (pp. 42–44), it was found that modestly diversified companies are a little more stable compared to single-business companies. These findings are based on the percentage of firms going bankrupt within a certain period of time. Furthermore, the authors find examples for multi-business firms with a sustainably better performance than single-business firms. However, according to the findings, this success is not based on the mere fact of diversification, but on superior corporate management of strategically related businesses [10] (pp. 42–44). Reference [12] found that, on the one hand, the temptation to diversify is generally strong once a company has reached a certain size and maturity. On the other hand, the study states that only a few diverse companies have generated more value through diversification when businesses are not connected adequately to each other. The authors in [12] found this to be the reason for the disappearance of
“unlikely pairings” within the years studied. Contrary to many managers’ beliefs, neither does [12]
(pp. 1–2) find an assumed better capital allocation across businesses compared to capital market allocation nor do they find an assumed risk reduction for investors to be the basis for superior performance through diversification. Rather, it is found that diversification tends to cap the upside potential for shareholders while not limiting the downside risk. Figure 3 visualizes this context based on the total return for shareholders (TRS) of the S&P 500 companies from 2002 to 2010.
Figure 3. Distribution of total return for shareholders (TRS) for conglomerates, moderately diversified companies, and focused companies. Based on [12] (p. 3), adapted.
Conglomerates can be defined as companies of three or more businesses that “do not have common customers, distribution systems, manufacturing facilities, or technologies” [12] (p. 3). While in terms of the median TRS more focused companies (11.8%) outperformed conglomerates (7.5%), the distribution in Figure 3 shows that some conglomerates did outperform some focused companies.
However, one can see from the above-described phenomenon that the upside potential is limited while the downside risk is not. According to [12] (p. 2), the reason for this distribution is that the chances for all businesses within a conglomerate to outperform are rather low. Therefore, the returns of outperforming businesses are “dwarfed” by underperforming businesses. The distribution also illustrates that moderately diversified companies have a higher upside potential compared to Figure 3.Distribution of total return for shareholders (TRS) for conglomerates, moderately diversified companies, and focused companies. Based on [12] (p. 3), adapted.
Conglomerates can be defined as companies of three or more businesses that “do not have common customers, distribution systems, manufacturing facilities, or technologies” [12] (p. 3). While in terms of the median TRS more focused companies (11.8%) outperformed conglomerates (7.5%), the distribution in Figure3shows that some conglomerates did outperform some focused companies. However, one can see from the above-described phenomenon that the upside potential is limited while the downside risk is not. According to [12] (p. 2), the reason for this distribution is that the chances for all businesses within a conglomerate to outperform are rather low. Therefore, the returns of outperforming businesses are “dwarfed” by underperforming businesses. The distribution also illustrates that moderately diversified companies have a higher upside potential compared to conglomerates, and that their outperforming share is still lower than the one of focused companies. In addition to the TRS, [12] (p. 2) also found more focused companies to outperform conglomerates on an aggregate level in terms of growth of revenues (9.2% compared to 6.3%) and returns on capital (increase of 3% compared to a decrease of 1%). The same as Müller-Stewens and Brauer, [12] (pp. 1–3) identified “being the best
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owner” of the respective businesses to be the key for adding more value to a multi-business firm.
According to the study, superior corporate management—particularly regarding allocation of capital between competing investments, portfolio management, or cost cutting—is the basis of this. In contrast to developed markets, where [12] (p. 4) expect conglomerates to disappear with time, the authors found conglomerate structures to still be attractive in emerging markets. Especially where extensive infrastructure is required, large conglomerates have economic advantages regarding acquisition of capital, resources, infrastructure, and needed relationships with the local governments.
Contrary to [12], Sturm [11] (p. 1) found a trend back from focusing to diversification. His study is based on an investigation of the biggest 1200 companies from the US, Europe, and Japan between 1995 and 2004. Besides this trend, Sturm [11] notes an appreciation of this strategy by shareholders as long as the assumed Earnings Before Interest and Taxes (EBIT) was at least 15%. The author found no significant differences in the performance of diversified companies compared to focused companies regarding Return on Sales (ROS) and Return on Capital Employed (ROCE). In addition, the study shows that 80% of all diversified companies, compared to 73% of all focused companies, grew in terms of both revenue and profit. Based on these findings, Roland Berger Strategy Consultants performed an enquiry among 39 German companies, which confirmed the assumed trend to diversify operations. A total of 80% of the companies had diversified within the last five years [11] (pp. 1–2). According to the results reported in [11] (pp. 1–2) and in Roland Berger Strategy Consultants [13] as well, the key to successful diversification is based on an accurate selection and consequent integration of businesses. Among the most important parameters for the selection of new businesses are the strategic relatedness of the companies’ core competence, regional and political stability of the targeted regions, and government support. A divisional organization with local responsibility for the acquired businesses is the favored long-term corporate structure [11] (pp. 1–2). Roland Berger Strategy Consultants [13] (p. 27) add up to their aforementioned conviction that diversification is a good actual and future business model.
Apart from the reduced risk for the firm, the main reasoning is the possible realization of growth options. These authors also state that this is especially interesting for companies that suffer from low margins in their actual businesses. Table1gives an aggregation of the main findings of the above-discussed studies regarding the performance of diversified compared to focused companies.
Table 1.Aggregation of the main findings regarding the performance of diversified vs. focused companies.
Reference Basis for Conclusion Result
Müller-Stewens and Brauer [10]
• Survival of companies within certain period of time
• “Sustainable performance”
• Modestly diversified firms more stable than single-business firms
• Examples for both, outperforming multi-business and
single-business firms
Cyriac et al. [12]
• Total Return for Shareholders (TRS) of S&P 500 firms from 2002 to 2010
• Focused firms outperform diversified firms on an aggregate level; limited upside potential, but unlimited downside risk for diversified firms compared to focused firms
Sturm [11]
• Return on Sales (ROS)
• Return on Capital Employed (ROCE)
• Growth of revenues and profits of 1200 biggest companies in the US, Europe, Japan, from 1995 to 2004
• No significant difference between diversifiers and focusers
• No significant difference between diversifiers and focusers
• Diversifiers outperform focusers
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2.2. Synergies within Integrated Firms
2.2.1. The Basic Synergy Concepts of Ansoffand Porter
In an economic context, “synergy” goes back to Igor Harry Ansoff’s bookCorporate Strategyin 1965, and was fundamentally extended as a concept by Michael E. Porter in his bookCompetitive Advantage, published in 1985 [14] (p. 17). Ansoff[15] was the first one to describe and investigate that the value of a combined use of resources can be higher than their separate use. This finding is often described as the “2+2=5 effect” [14] (p. 13). Ansoff’s research focused on a description of the effect of synergies, which he describes as the positive effect on the return on capital through realized synergies [14] (pp. 17–20):
Return on capitalcombined effort>Return on capitalseparate effort (1) In this equation the return on capital is defined as
Return on capital= Revenue−Costs
Invested capital (2)
Ansoff [15] generally distinguishes between four types of synergies, namely, (1) income synergies (increasing the company’s revenue); (2) operating synergies (decrease of production costs);
(3) investment synergies (lowering the employment of capital); and (4) management synergies.
Management synergies can cause both increased revenue and reduced costs [14] (p. 18). Ansoffexpects a higher synergy potential between related than unrelated businesses [16] (p. 15). Porter [14] sees the realization of synergies as a basis for the long-term competitive advantages of a company. He analyzed synergies based on a value chain approach. To this end, he divided companies’ business units into strategically relevant functional units, finding material and immaterial interrelations between these functional units [14] (pp. 20–23). According to his understanding, Porter considers synergies on the level of business units rather than at a corporate level, where the strategic focus lies on risk diversification.
Thus—similar to Ansoff—he sees some synergy potential, especially between related businesses [16]
(pp. 16–17). In contrast to Ansoff [15], who compared the overall performance of stand-alone and combined businesses (cf. Equation (1)), Porter compares the effects of interrelations between the company’s functional units separately. He found five types of material interrelations, namely, (1) production interrelations; (2) market interrelations; (3) procurement interrelations; (4) technological interrelations; and (5) infrastructural interrelations. Immaterial interrelations are caused by skill and knowledge transfer between different functional units [14] (pp. 20–23). For Porter [14], the main attributes for the realization of positive synergies are the interrelation caused by cost advantages or differentiation, low risk of imitation by competitors, lower costs for realization than costs for combined use of resources, and that the interrelation has to be realized within high cost or high revenue activities [14] (pp. 20–23). On the one hand, Porter sees advantages in the combined effort along the value chain due to a more intensive use of resources. On the other hand, he identified problems in the combined effort that can lead to increased costs, namely, (1) costs of coordination (e.g., costs for extensive information technology (IT) systems); (2) costs of compromise (e.g., due to organizational structures that are less optimal than the ones of formerly independent businesses); (3) costs of control (e.g., costs for extended governance to avoid opportunistic behavior); and (4) and costs of inflexibility (e.g., due to reciprocal dependency) [14] (pp. 20–23).
Following the basic work of Ansoff[15] and Porter [14], synergies have been subject to multiple studies, setting the focus on different characteristics and extending the concepts towards different directions. Generally, benefits of a combined effort are only regarded as synergies if they would not have been realized by the stand-alone businesses. Furthermore, the general understanding is that there can be positive synergies as well as negative ones (“dyssynergies”). This makes it necessary to evaluate both effects in order to evaluate the net synergies, which should be positive in order to make
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their realization reasonable [14] (pp. 13–14). However, today there is still no general definition for the term “synergy”, which makes it necessary to define it for the purpose of this study.
2.2.2. The Synergy Concept of Müller-Stewens and Brauer
Some authors by definition exclude certain types of benefits through operation of a multi-business firm from the term synergy. As our study focuses on the question whether operation of a multi-business firm is beneficial, it does not make sense to exclude any types of benefits or synergies from the evaluation a priori. In [10] (pp. 350–351), following a global approach that includes all types of potential benefits, the authors found the realization of synergies to be based mainly on coordination at the corporate level. Therefore, in our study the categorization of synergies draws on this concept. Based on the concepts proposed by Ansoff[15] and Porter [14], Müller-Stewens and Brauer [10] (pp. 350–351) systematically distinguish between four basic types of synergies, namely, (1) operational synergies;
(2) management synergies; (3) financial synergies; and (4) synergies of market power.
Figure4gives an overview of the first two of the above-described synergy types and their further specification. As synergies of market power are mainly collusive, they will not be subject of the evaluation within this study. Financial synergies are generally accepted to be one of the main reasons for the creation of multi-business firms. Our study focuses on the evaluation of synergies in the context of multi-business utilities. Financial synergies are similar to all types of multi-business firms. Therefore, they will not be subject to closer evaluation here either. In addition, RWE ran a sophisticated portfolio strategy management tool that includes the most influential financial synergies. The results of our study can form the basis for further investigations on the question whether other synergies could potentially be included in this tool.
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have been realized by the stand-alone businesses. Furthermore, the general understanding is that there can be positive synergies as well as negative ones (“dyssynergies”). This makes it necessary to evaluate both effects in order to evaluate the net synergies, which should be positive in order to make their realization reasonable [14] (pp. 13–14). However, today there is still no general definition for the term “synergy”, which makes it necessary to define it for the purpose of this study.
2.2.2. The Synergy Concept of Müller-Stewens and Brauer
Some authors by definition exclude certain types of benefits through operation of a multi- business firm from the term synergy. As our study focuses on the question whether operation of a multi-business firm is beneficial, it does not make sense to exclude any types of benefits or synergies from the evaluation a priori. In [10] (pp. 350–351), following a global approach that includes all types of potential benefits, the authors found the realization of synergies to be based mainly on coordination at the corporate level. Therefore, in our study the categorization of synergies draws on this concept. Based on the concepts proposed by Ansoff [15] and Porter [14], Müller-Stewens and Brauer [10] (pp. 350–351) systematically distinguish between four basic types of synergies, namely, (1) operational synergies; (2) management synergies; (3) financial synergies; and (4) synergies of market power.
Figure 4 gives an overview of the first two of the above-described synergy types and their further specification. As synergies of market power are mainly collusive, they will not be subject of the evaluation within this study. Financial synergies are generally accepted to be one of the main reasons for the creation of multi-business firms. Our study focuses on the evaluation of synergies in the context of multi-business utilities. Financial synergies are similar to all types of multi-business firms.
Therefore, they will not be subject to closer evaluation here either. In addition, RWE ran a sophisticated portfolio strategy management tool that includes the most influential financial synergies. The results of our study can form the basis for further investigations on the question whether other synergies could potentially be included in this tool.
Figure 4. Categorization of synergy types. Own illustration, based on [10] (p. 354).
As indicated before, the focus of this categorization lies on the potential gain of value on the corporate level of a multi-business firm. Therefore, in this overview, the corporate center is shown overhead of three exemplary business units (BUs). Müller-Stewens and Brauer [10] (p. 354) refer to BUs as strategic ones. Every BU, therefore, represents a certain functional unit. The arrows in the chart show the direction of information or resources flow for the respective synergy types.
(i) Operational synergies. Operational synergies are advantages that derive from a joint use of operational resources across the borders of the different BUs. The joint use can be achieved by sharing, combining, or transferring both material and immaterial resources. The question hereby is how to utilize the resources that are only being used in one BU for other BUs. This joint effort can result in both cost advantages and income advantages. Examples for cost advantages from operational synergies are centralized internal and external service facilities (shared-services) for the entire firm, procurement at the corporate level, knowledge and best-practice transfer, and joint use of infrastructure. An example for income advantages is the possibility of offering diverse products to the same customers (cross-selling and integrated offers) [10] (pp. 24–25; 354–355).
Figure 4.Categorization of synergy types. Own illustration, based on [10] (p. 354).
As indicated before, the focus of this categorization lies on the potential gain of value on the corporate level of a multi-business firm. Therefore, in this overview, the corporate center is shown overhead of three exemplary business units (BUs). Müller-Stewens and Brauer [10] (p. 354) refer to BUs as strategic ones. Every BU, therefore, represents a certain functional unit. The arrows in the chart show the direction of information or resources flow for the respective synergy types.
(i) Operational synergies. Operational synergies are advantages that derive from a joint use of operational resources across the borders of the different BUs. The joint use can be achieved by sharing, combining, or transferring both material and immaterial resources. The question hereby is how to utilize the resources that are only being used in one BU for other BUs. This joint effort can result in both cost advantages and income advantages. Examples for cost advantages from operational synergies are centralized internal and external service facilities (shared-services) for the entire firm, procurement at the corporate level, knowledge and best-practice transfer, and joint use of infrastructure.
An example for income advantages is the possibility of offering diverse products to the same customers (cross-selling and integrated offers) [10] (pp. 24–25; 354–355).
(ii) Management synergies.Management synergies are advantages that derive from certain abilities the corporate center owns and infuses into the BUs. Where operational synergies are based on the similarity or the complementarity of resources on the BU’s level, management synergies are based on
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the strategic fit between the abilities of the corporate center and the needs of the BUs. Examples for management synergies are the development of centers of excellence on the corporate level, such as for market research, mergers and acquisitions (M&A), and legal matters, or for innovation and growth, which can be used at the business level [10] (pp. 24–25; 354–355).
Operational synergies are generally considered to have a higher potential value for a company with related strategic businesses. The scope of our study lies on this branch of synergies, which therefore is described in some more detail. Note that in the literature, the term synergy is closely related to the terms “economies of scale” and “economies of scope”, which both refer to operational synergies. As can be seen in Figure5, operational synergies can be both cost synergies and income synergies. Where economies of scale only appear as cost synergies, economies of scope can lead to both cost synergies and income synergies [10] (p. 356).
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(ii) Management synergies. Management synergies are advantages that derive from certain abilities the corporate center owns and infuses into the BUs. Where operational synergies are based on the similarity or the complementarity of resources on the BU’s level, management synergies are based on the strategic fit between the abilities of the corporate center and the needs of the BUs.
Examples for management synergies are the development of centers of excellence on the corporate level, such as for market research, mergers and acquisitions (M&A), and legal matters, or for innovation and growth, which can be used at the business level [10] (pp. 24–25; 354–355).
Operational synergies are generally considered to have a higher potential value for a company with related strategic businesses. The scope of our study lies on this branch of synergies, which therefore is described in some more detail. Note that in the literature, the term synergy is closely related to the terms “economies of scale” and “economies of scope”, which both refer to operational synergies. As can be seen in Figure 5, operational synergies can be both cost synergies and income synergies. Where economies of scale only appear as cost synergies, economies of scope can lead to both cost synergies and income synergies [10] (p. 356).
Figure 5. Classification and specification of synergies according to Müller-Stewens and Brauer.
Source: Based on [10] (2009: p. 376), adapted.
As indicated before, cost synergies derive from a joint use—by means of sharing or transferring—of both material and/or immaterial resources. Müller-Stewens and Brauer [10] (pp. 356–
358) identify the main sources for cost synergies to be situations in which (1) different products can be fabricated from the same starting material (combined production); (2) existing infrastructure is not entirely being utilized in the existing production process; (3) bundling of similar services or standardization of processes can lead to economies of scale or learning effects; (4) best practices can be transferred to other business units; and (5) resources can be used in more than one business unit.
According to [10] (pp. 358–359), income synergies derive from the combination of complimentary resources. Through combination of complimentary resources, both new markets and new customer segments can be reached. Müller-Stewens and Brauer [10] (pp. 369–376) found the main strategies for the realization of income synergies to be (1) coordinated market penetration by means of cross-selling, bundling (e.g., one-stop shopping), coordinated marketing activities, or a family branding strategy; (2) joint production development by means of integrated solutions, technology and product platforms, or innovative combination of resources; (3) coordinated market development by means of development of new geographical markets, or development of new customer segments; and (4) combinatory diversification by means of expansion into new markets, or creation of new markets.
Figure 5.Classification and specification of synergies according to Müller-Stewens and Brauer. Source:
Based on [10] (2009: p. 376), adapted.
As indicated before, cost synergies derive from a joint use—by means of sharing or transferring—of both material and/or immaterial resources. Müller-Stewens and Brauer [10] (pp. 356–358) identify the main sources for cost synergies to be situations in which (1) different products can be fabricated from the same starting material (combined production); (2) existing infrastructure is not entirely being utilized in the existing production process; (3) bundling of similar services or standardization of processes can lead to economies of scale or learning effects; (4) best practices can be transferred to other business units; and (5) resources can be used in more than one business unit.
According to [10] (pp. 358–359), income synergies derive from the combination of complimentary resources. Through combination of complimentary resources, both new markets and new customer segments can be reached. Müller-Stewens and Brauer [10] (pp. 369–376) found the main strategies for the realization of income synergies to be (1) coordinated market penetration by means of cross-selling, bundling (e.g., one-stop shopping), coordinated marketing activities, or a family branding strategy;
(2) joint production development by means of integrated solutions, technology and product platforms, or innovative combination of resources; (3) coordinated market development by means of development of new geographical markets, or development of new customer segments; and (4) combinatory diversification by means of expansion into new markets, or creation of new markets.
In the elaborations of synergies discussed above, Müller-Stewens and Brauer (pp. 369–376) remain on a rather theoretical level, providing a classification and specification of all kinds of synergies but
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not giving any insights or instructions on how to identify and evaluate the aforementioned synergies either qualitatively or quantitatively on a practical level.
However, both qualitative and quantitative synergy evaluation is of major importance. Only if the synergies’ potential value for the company exceeds the cost of realization of the respective synergies, the realization is economically viable. In addition, one has to consider whether the potential value of synergy realization is worth the risk. Therefore—in a first step—out of the numerous theoretical potential synergies, those which are the potential value drivers for the company have to be identified.
In a subsequent step, these potential value-driving synergies need to be evaluated on a quantitative basis in order to justify the cost of realization. Section2.2.3will present general considerations and selected concepts for qualitative and quantitative synergy evaluation. These are then used to analyze RWE as a selected European multi-business utility for its value driving synergies within this study of the 2012 situation.
2.2.3. Synergy Evaluation
Section2.1has shown that in modern economic science there is no clear definition for synergies.
Acknowledging that it is already challenging to find a precise definition for synergies, research on contemporary studies shows that both qualitative and especially quantitative evaluation of synergies is even more challenging. Following Müller-Stewens and Brauer [10], synergies have been categorized into operational synergies, management synergies, financial synergies, and synergies of market power.
Based on this theoretical framework, this section focuses on more recent studies of concepts for synergy evaluation.
Concepts for Qualitative Synergy Evaluation
Rockholtz et al. [17] (p. 189) identify checklist approaches, scoring models, cost-synergy analyses, synergy matrices (based on Ansoff [15]), and scenario techniques to be the most frequently used instruments for qualitative synergy evaluation. Some of these instruments can also be used for quantitative synergy evaluation (e.g., scenario technique) [18]. Figure6gives an overview of the different stages in (pre-acquisition) synergy evaluation (identification and evaluation) and the respective operational responsibilities as well as suitable measures and methods to achieve this.Energies 2020, 13, x FOR PEER REVIEW 12 of 42
Figure 6. Overview of the duties and operational responsibility, measures, and methods during synergy-oriented acquisition management (pre-acquisition). Own illustration, based on Rockholtz et al. [17] (p. 196).
Stuckey and White [19] (p. 15) suggest a checklist for qualitative evaluation in order to decide whether to vertically integrate (or quasi-integrate) or not. They also propose a specific checklist to evaluate whether an already vertically integrated business should be divested (see Figure A1). They base their decision-making on both internal questions (e.g., the company’s competence) and external questions (e.g., market power of the respective company and competitors). In their empirical research, Rockholtz et al. [17] (pp. 190–192) found external whole-company-based performance indicators to be often derived from performance indicators from annual reports or capital market developments. However, he assessed the internal numbers from managerial accounting, to enable allocation of success (based on cash flows) to the respective synergies, to be much more precise, and thus a better basis of any systematic due diligence approach (pre-merger or pre-acquisition).
Concepts for Quantitative Synergy Evaluation
Using Ansoff’s and Porter’s synergy concepts as a foundation, many authors have stressed the necessity of the identification and qualitative evaluation of synergies is necessary before forming a multi-business firm (e.g., [20], pp. 13–16; [21], pp. 4–5). Where this can be done based on general concepts, Burde [20] (pp. 22–24) and Köppen [21] (p. 124) does not find any general concepts for quantitative synergy evaluation in the literature. Köppen [21] (pp. 9–11, 94) states that he found hardly any concepts, including sufficient models, for the quantification of synergies.
Other than qualitative synergy evaluation, it is subject to discussion whether quantitative synergy evaluation is necessary. Burde [20] (pp. 22–24) finds evidence that many M&A experts are convinced that pre-merger synergy quantification is either unnecessary or—due to insufficient information—infeasible in practice. Quoting Coburn, Köppen [21] (p. 97) emphasizes the necessity of quantitative synergy evaluation in order to justify multi-business models (“If you can’t put numbers on synergy, then it probably doesn’t exist”; ibid. p.124), which coincides with the market capitalization, reflecting the shareholders’ opinion about future value generation.
Apart from the lack of information in pre-merger situations, Burde [20] (pp. 22–24) sees the biggest challenge in assigning numbers to each category of synergies. Whereas economies of scale are generally taxable, immaterial or strategic (“soft”) synergies, such as image improvement or Figure 6. Overview of the duties and operational responsibility, measures, and methods during synergy-oriented acquisition management (pre-acquisition). Own illustration, based on Rockholtz et al. [17] (p. 196).
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Starting on the left-hand side of Figure6, the first potential synergies have to be determined and allocated towards the respective value-adding activities. This, for example, can be achieved by using the method of value chain analysis (cf. [14]). The result of this determination could be a list, classifying potential synergies according to [10] (pp. 369–376). The next step is the qualitative evaluation of the synergies found. At this step, the relative potential of the synergies has to be compared in order to find the main value drivers; also, the risk of non-realization should be evaluated here. One possible method for this qualitative evaluation is the use of a scenario technique. Proceeding to the right-hand side of Figure6, finally, a quantitative evaluation should be performed. Rockholtz, Berens and Brauner [17]
(pp. 190–192) suggests the use of financial plans in order to calculate synergy-based cash flows.
Stuckey and White [19] (p. 15) suggest a checklist for qualitative evaluation in order to decide whether to vertically integrate (or quasi-integrate) or not. They also propose a specific checklist to evaluate whether an already vertically integrated business should be divested (see FigureA1).
They base their decision-making on both internal questions (e.g., the company’s competence) and external questions (e.g., market power of the respective company and competitors). In their empirical research, Rockholtz et al. [17] (pp. 190–192) found external whole-company-based performance indicators to be often derived from performance indicators from annual reports or capital market developments. However, he assessed the internal numbers from managerial accounting, to enable allocation of success (based on cash flows) to the respective synergies, to be much more precise, and thus a better basis of any systematic due diligence approach (pre-merger or pre-acquisition).
Concepts for Quantitative Synergy Evaluation
Using Ansoff’s and Porter’s synergy concepts as a foundation, many authors have stressed the necessity of the identification and qualitative evaluation of synergies is necessary before forming a multi-business firm (e.g., [20], pp. 13–16; [21], pp. 4–5). Where this can be done based on general concepts, Burde [20] (pp. 22–24) and Köppen [21] (p. 124) does not find any general concepts for quantitative synergy evaluation in the literature. Köppen [21] (pp. 9–11, 94) states that he found hardly any concepts, including sufficient models, for the quantification of synergies.
Other than qualitative synergy evaluation, it is subject to discussion whether quantitative synergy evaluation is necessary. Burde [20] (pp. 22–24) finds evidence that many M&A experts are convinced that pre-merger synergy quantification is either unnecessary or—due to insufficient information—infeasible in practice. Quoting Coburn, Köppen [21] (p. 97) emphasizes the necessity of quantitative synergy evaluation in order to justify multi-business models (“If you can’t put numbers on synergy, then it probably doesn’t exist”; p.124), which coincides with the market capitalization, reflecting the shareholders’ opinion about future value generation.
Apart from the lack of information in pre-merger situations, Burde [20] (pp. 22–24) sees the biggest challenge in assigning numbers to each category of synergies. Whereas economies of scale are generally taxable, immaterial or strategic (“soft”) synergies, such as image improvement or knowledge transfer, are difficult to quantify. Despite these difficulties, according to [20] (pp. 22–24, 26–27), in most of the relevant literature synergies are generally evaluated based on cash flows.
The (pre-merger) complexity in quantifying strategic synergies derives from the difficulty to predict other market participants’ behavior. Whereas intra-company synergy potentials are realizable independently of market participants, strategic synergy potentials are heavily influenced by market participants’ decisions. This can be subsumed as a dimension of “market closeness” [20] (pp. 26–27).
Similar to [20], Köppen [21] (pp. 74–77; 124–134) distinguishes between non-strategic and strategic synergies, finding that non-strategic synergies usually result from the physical resources of the businesses. According to him, these synergies’ positive effects are generally short-lived but quantifiable. On the other hand, he describes strategic synergies to usually result from immaterial resources, such as know-how or positive reputation. These synergies’ positive effects are generally long-lived but hardly quantifiable due to causal ambiguity.
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In light of the great challenges concerning the quantification and the long-term focus (high discount on values) of strategic synergies, Köppen [21] (pp. 124–134) suggests disregarding these in order to obtain a more conservative and less risky synergy evaluation and avoid “pseudo-quantification”. He finds pros and cons for disregarding or weighting strategic synergies and recommends to at least critically review them and not solely to base multi-business models on these. He advises against quantifying strategic synergies, but instead to regard them as a “safety buffer” in the case of under-realization of non-strategic synergies [21] (pp. 124–134).
3. Methodology
In order to analyze the European utilities responses to the development of the energy market in Europe and the performance of “integrated” versus “focused” European utilities, we make use of an inductive qualitative method, since the quantitative synergy evaluation demands deep insights and extensive expert knowledge of the respective businesses, which is beyond the scope of the present investigation.
For this research, data was generated and analyzed by including in-depth interviews, survey data, as well as workshops with strategy experts responsible for RWE’s operational companies. The approach adopted is in line with the research question and enables an assessment of the capital market’s opinion on future business models. It also enables to evaluate whether the multi-business model is still useful for the present energy market by gathering information from the relevant stakeholders. Figure7 depicts the stages of the research approach adopted in the present study.
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knowledge transfer, are difficult to quantify. Despite these difficulties, according to [20] (pp. 22–24, 26–27), in most of the relevant literature synergies are generally evaluated based on cash flows.
The (pre-merger) complexity in quantifying strategic synergies derives from the difficulty to predict other market participants’ behavior. Whereas intra-company synergy potentials are realizable independently of market participants, strategic synergy potentials are heavily influenced by market participants’ decisions. This can be subsumed as a dimension of “market closeness” [20] (pp. 26–27).
Similar to [20], Köppen [21] (pp. 74–77; 124–134) distinguishes between non-strategic and strategic synergies, finding that non-strategic synergies usually result from the physical resources of the businesses. According to him, these synergies’ positive effects are generally short-lived but quantifiable. On the other hand, he describes strategic synergies to usually result from immaterial resources, such as know-how or positive reputation. These synergies’ positive effects are generally long-lived but hardly quantifiable due to causal ambiguity.
In light of the great challenges concerning the quantification and the long-term focus (high discount on values) of strategic synergies, Köppen [21] (pp. 124–134) suggests disregarding these in order to obtain a more conservative and less risky synergy evaluation and avoid “pseudo- quantification”. He finds pros and cons for disregarding or weighting strategic synergies and recommends to at least critically review them and not solely to base multi-business models on these.
He advises against quantifying strategic synergies, but instead to regard them as a “safety buffer” in the case of under-realization of non-strategic synergies [21] (pp. 124–134).
3. Methodology
In order to analyze the European utilities responses to the development of the energy market in Europe and the performance of “integrated” versus “focused” European utilities, we make use of an inductive qualitative method, since the quantitative synergy evaluation demands deep insights and extensive expert knowledge of the respective businesses, which is beyond the scope of the present investigation.
For this research, data was generated and analyzed by including in-depth interviews, survey data, as well as workshops with strategy experts responsible for RWE’s operational companies. The approach adopted is in line with the research question and enables an assessment of the capital market’s opinion on future business models. It also enables to evaluate whether the multi-business model is still useful for the present energy market by gathering information from the relevant stakeholders. Figure 7 depicts the stages of the research approach adopted in the present study.
Figure 7. Stages of the research approach adopted.
After specifying the research problem and questions, research started with an extensive literature review, followed by the sample selection, where RWE was found to be the most representative company for the means of this research. Data was then collected by conducting qualitative interviews (undertaken by co-author J.F. during an internship) and company-internal workshops. The collected information was then systematically analyzed in order to gain an overall understanding of stakeholders in the energy market and their business strategy with regard to
“integrated” and “focused” business structures. This, finally, enabled a well-founded assessment of existing potentials and resulting implications for the future energy market and possible business models.
Figure 7.Stages of the research approach adopted.
After specifying the research problem and questions, research started with an extensive literature review, followed by the sample selection, where RWE was found to be the most representative company for the means of this research. Data was then collected by conducting qualitative interviews (undertaken by co-author J.F. during an internship) and company-internal workshops. The collected information was then systematically analyzed in order to gain an overall understanding of stakeholders in the energy market and their business strategy with regard to “integrated” and “focused” business structures. This, finally, enabled a well-founded assessment of existing potentials and resulting implications for the future energy market and possible business models.
4. Empirical Analysis
4.1. Business Structure and Market Analysis in the Energy Supply Industry 4.1.1. Energy Market Development in Germany and Europe
The value chain in the energy market can generally be divided into three business areas: upstream, midstream, and downstream. The upstream businesses include all operations performed in order to generate secondary energy, which—in the discussed case of grid-bound energies—is electricity or gas. Exploration and production (E&P) refer to crude oil and natural gas, which can often be (co-) produced from the same field or location. Generation refers to the generation of electricity.
The midstream businesses include all kinds of energy trading, encompassing short- and long-term contracts, over-the-counter and standardized energy exchange deals, supply, origination, proprietary trading, etc. All operations of energy transmission, distribution, and retail to the end consumer are considered as downstream businesses.